May 24, 2023

Daily Market Commentary

Canadian Headlines

  • Bank of Nova Scotia missed analysts’ estimates as the lender failed to capitalize on rising interest rates and took a bigger provision for potentially souring loans than expected. Net interest margin — the difference between what the bank earns from loans and what it pays depositors — was 2.13% in the fiscal second quarter, compared with 2.11% in the previous three months and 2.23% a year earlier. Excluding some items, profit totaled C$1.70 a share, less than the C$1.76 average estimate of 11 analysts in a Bloomberg survey. Higher set-asides for credit losses hurt net income in both the Canadian banking and the global banking and markets segments. The Canadian banking segment also dealt with higher non-interest expenses, with revenue up from a year earlier countering the increase.
  • Bank of Montreal posted a surprise drop in fiscal second-quarter profit as it set aside a larger provision for loan losses than analysts had expected and trading revenue fell. The bank’s provision for credit losses of C$1.02 billion ($755 million) included an initial C$517 million on the performing loan portfolio of Bank of the West, the bank said in a statement Wednesday. It’s the first time Bank of Montreal has reported results that include the San Francisco-based lender, which it bought from BNP Paribas SA for $16.3 billion. Excluding some items, profit was C$2.93 a share, missing the C$3.21 average estimate of analysts in a Bloomberg survey.
  • Quebec’s government has chosen former pension fund head Michael Sabia as the next chief executive officer of Hydro-Quebec, according to people familiar with the matter. Sabia has been tapped to succeed Sophie Brochu, who left as head of the massive electrical utility in April. The appointment is expected to be made Wednesday after formal approval from Quebec’s cabinet, the people said, speaking on condition they not be named because the matter is still private. Sabia, 69, is Canada’s deputy minister of finance, serving as the top bureaucrat to Finance Minister Chrystia Freeland. Earlier this year, he helped craft the Canadian government’s C$491 billion ($364 billion) budget for the 2023-24 fiscal year, laden with incentives for low-carbon technology, including clean electricity.
  • Abetted by an unseasonably hot spring, hundreds of wildfires have ignited across the Canadian province of Alberta, choking the skies with smoke and forcing the evacuation of about 40,000 people. The blazes in Canada’s top energy-producing province have knocked out a fifth of the nation’s natural gas output at times and are expected to put a dent in economic growth numbers for the month of May. Alberta’s tar sands, whose 3.25 million barrels of daily oil output make Canada the world’s fourth-largest crude producer, have so far been spared, but officials are warning that conditions are ripe for fires to spring up anywhere, anytime. That possibility has companies, investors and the residents of the oil sands’ unofficial capital of Fort McMurray—which almost burned to the ground seven years ago—on high alert. With the infernos now raging into their third week with no end in sight, the ultimate economic impact is difficult to predict. The fires “continue to inflict significant damage,” according to Rob Roach, deputy chief economist at ATB Financial. Roach’s Edmonton-based company estimates the fires could shave 0.1% to 0.3% off Canada’s real gross domestic product for May, depending on how much energy production is shut down and for how long.

World Headlines

  • European stocks slid for a second day, following losses on Wall Street as the debt-ceiling talks dragged on, while a hotter-than-expected UK inflation print weighed on British stocks. The Stoxx 600 fell 1.4% at 9:25 a.m. in London, with all sectors in negative territory. Britain’s FTSE 100 index shed as much as 1.6%, with homebuilders Taylor Wimpey Plc and Persimmon Plc leading the losses, as the inflation figures escalated bets on further interest rate hikes from Bank of England. “European equities remain under pressure mainly on the back of growing anxiety among investors around the debt ceiling. While the news flow will remain noisy over the short-term, our baseline scenario is still that of a deal in the eleventh hour, which could be sometime between early June and late July,” Mathieu Racheter, head of equity strategy at Julius Baer said.
  • US futures dipped, signaling the S&P 500 will extend yesterday’s 1.1% retreat. Treasuries hovered around current levels and investors are continuing to demand a premium to hold US debt, especially those at the highest risk of default. Yields on securities maturing June 6 topped 6% Tuesday, compared with bills maturing May 30 that are yielding about 2%. The two-year Treasury yield edged lower after eight straight days of gains, while the 10-year yield was flat.
  • Asian stocks fell for a second day as an impasse in US debt ceiling negotiations weighed on sentiment, with Chinese shares wiping out this year’s gains amid mounting headwinds. The MSCI Asia Pacific Index dropped as much as 0.9%, the most in a month, with most sub-sectors declining except utilities. Japanese shares continued to retreat, as some investors took profit after the recent rally brought benchmarks to overbought levels. Hong Kong benchmarks were the biggest underperformers, with the CSI 300 Index of onshore stocks erasing its gain for the year. A fragile economic recovery, rising geopolitical tensions, a weak yuan and the threat of another Covid wave have turned investors away.
  • Oil rose for a third day after Saudi Arabia’s latest warning to short-sellers suggested OPEC+ could reduce output further to buoy prices. West Texas Intermediate futures climbed toward $74 a barrel after adding almost 2% over the previous two days. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman told speculators on Tuesday to “watch out,” just over a week before the Organization of Petroleum Countries and its allies meet to review their output policy for the second half of the year. The oil market also received bullish impetus from an American Petroleum Institute report showing US nationwide crude inventories declined by 6.8 million barrels last week. If confirmed by government figures later Wednesday, it would be the biggest drop since late March.
  • Gold steadied after a small gain in the previous session as US debt-ceiling talks continued to drag on with no resolution in sight. After tumbling last week to the lowest since early April, bullion has been trading in a tight range as investors wait for more clarity on the debt-ceiling standoff and the Federal Reserve’s rate path. Speaker Kevin McCarthy said late Tuesday the two parties had yet to reach a deal on the debt limit, unnerving financial markets. Spot gold was barely changed at $1,974.58 an ounce as of 8:51 a.m. in London, after adding 0.2% in the previous session. The Bloomberg Dollar Spot Index was flat after gaining 0.2% on Tuesday. Silver edged down and platinum declined, while palladium also fell.
  • Shares in one of Europe’s largest gaming companies plunged the most on record after a partnership deal worth more than $2 billion collapsed, prompting a slashed profit forecast for the year. Sweden’s Embracer Group AB dropped as much as 41% on Wednesday after announcing that a “groundbreaking strategic partnership” over a period of six years would not materialize. The company said it had received “a negative outcome” from the unnamed counterparty late on Tuesday night, prior to the publication of fourth quarter results. Like elsewhere in corporate Sweden, Embracer has been a prolific dealmaker amid the era of zero interest rates and ever rising stock markets. The company snapped up 110 studios over a period of two years, more than doubling its developer portfolio, as part of an aggressive growth plan. In 2021, it bought Gearbox Software LLC in a $1.3 billion deal and a year later it acquired French board game maker Asmodee for $3 billion.
  • Debt limit talks in Washington have hit a fresh impasse with negotiators far apart on key issues, especially the spending cuts demanded by Republicans, as time runs short to avert a historic US default. There was no sign that President Joe Biden and House Speaker Kevin McCarthy had spoken since their meeting at the White House on Monday. A new round of discussions between their hand-picked negotiators on Tuesday ended with the two sides deadlocked over an eventual agreement to raise the federal borrowing limit. House Republicans escalated their accusations that Biden lacked urgency in negotiations, while a Democratic aide called McCarthy unwilling to compromise across a wide spectrum of disputed points, threatening the legislative prospects of a deal.
  • Minutes of the May 2-3 FOMC meeting will likely reveal that concern over credit conditions convinced most Fed officials to signal an impending rate pause. Even so, some might have been more reluctant than others, worried that inflation is coming down too slowly. The diverse reads on the economy suggest the consensus for a wait-and-see approach could be fragile. Bloomberg Economics expects the Fed to hold rates steady when it next meets June 14–15, as our baseline is that a last-minute deal on the debt ceiling will raise financial volatility ahead of the meeting and weigh on the economic outlook. Odds favor a prolonged pause thereafter. If the debt-ceiling impasse is resolved uneventfully — with a comfortable margin before the X-date and only small spending cuts — a 25-basis-point hike will be on the table in June.
  • Many large European banks are emerging from early rounds of a key stress test in robust financial health, prompting some regulators to question whether to push harder at a time when investors are focused on the industry’s resilience. Initial submissions to the European Banking Authority’s biennial assessment show several lenders’ capital ratios are higher than in previous exercises under the so-called adverse scenario, people with knowledge of the matter said, asking to remain anonymous as the submissions are private. That’s prompting the EBA and European Central Bank to lean on banks to be more conservative in subsequent rounds of the tests, which are set to conclude at the end of July. The EBA assessment is a key exam for lenders because it gives insight into their preparedness to weather shocks and also feeds into their capital requirements. Banks, using data from the end of 2022, are tested under an adverse scenario and more benign baseline scenario for the three years through 2025. A clean bill of health strengthens the case for distributing billions of euros of capital to shareholders, even as economic uncertainty increases.
  • A Yugoslav war refugee turned Swedish property tycoon is fast running out of options to stabilize his $13 billion empire, and the outcome will have ripple effects across Europe’s real estate industry. Ilija Batljan started amassing a portfolio of more than 2,000 properties in 2016, buying up social housing and municipal buildings from cash-strapped authorities and leasing them back. The idea was to combine steady growth with stable returns provided by reliable, long-term tenants — but the reality was an appetite for debt that was too much for the Swedish market. His company Samhallsbyggnadsbolaget i Norden AB — better known as SBB — is now teetering after a downgrade to junk status and time is running short to tame an $8 billion debt pile. The 55-year-old’s narrowing list of choices are all difficult: raise capital at severely discounted levels; divest properties at fire-sale prices and put valuations at risk; or sell a stake in the company he built from scratch to an outside investor.
  • UBS Group AG will make a decision on the future of the domestic Swiss business it acquired from Credit Suisse Group AG in the third quarter of this year, it said in a US regulatory filing. The Swiss lender expects the acquisition of its Zurich rival to close at the end of this month at the earliest. While UBS originally had planned to fully integrate Credit Suisse’s local unit, it later backtracked with Chief Executive Officer Sergio Ermotti saying that all options were on the table, including a sale or spin off.  The emergency takeover of Credit Suisse brokered by the government in March hands UBS a dilemma on what to do with the lender’s more profitable local business. While the unit has been seen as a prized possession for UBS to gain, Swiss-based companies and politicians have voiced concerns over the market power that the combined bank would exercise.
  • US mortgage rates rose to a more than two-month high, reducing home purchase and refinance activity. The contract rate on a 30-year fixed mortgage increased 12 basis points to 6.69%, according to Mortgage Bankers Association data out Wednesday. The index of applications for home purchases fell 4.3% in the week ended May 19 to the lowest level since early March. Mortgage rates have been climbing in recent weeks alongside the yield on the 10-year Treasury note as negotiations over raising the US debt ceiling remain at an impasse. High borrowing costs have given homeowners little incentive to list their properties and move, pushing more prospective buyers to new construction.
  • Petco Health & Wellness Co.’s sales exceeded Wall Street estimates in the first quarter as spending on pet food and services remained robust. Demand in those categories is helping to make up for a lingering slump in supplies such as leashes, collars and toys as US shoppers pull back from nonessential goods, Chief Executive Officer Ron Coughlin said as Petco reported financial results Wednesday. Larger retailers such as Target Corp. and Walmart Inc. have also flagged weakness in discretionary items. Petco is trying to counteract the weakness in pet supplies, which often carry higher profit margins than food, by expanding its assortment of lower-priced goods and pressuring suppliers for better deals, Coughlin said. While sales softened in March and April compared with the first two months of the year, the San Diego-based retailer reiterated its financial forecasts for the current year.
  • Even record dividends aren’t tempting investors enough to bet on stocks they see as more vulnerable in a recession. Big payers in the energy, mining and financial sectors have trailed the market this year as investors rotated away from cyclicals into defensive and growth sectors. That’s made dividend yield among the worst-performing investing factors in Europe and the US, according to data compiled by Bloomberg. Risks of a recession are rising in Europe and the US, with the timing of a peak in central banks’ rate-hike campaigns hotly debated. Companies with robust balance sheets, profit growth and potential for expansion have found favor, while there’s uncertainty about whether dividend aristocrats can maintain their largesse in leaner times. Recent banking turmoil has also made traders wary of financials.
  • Elon Musk’s plan to host Ron DeSantis’ 2024 presidential campaign announcement on Twitter will mean promotion of the live audio event to the billionaire’s more than 140 million followers on the platform he owns, underscoring the social network’s shift toward a more partisan approach to political discourse. While Musk said Tuesday that it’s important for Twitter to have a range of voices, the open embrace of a national candidate at such a critical campaign moment resembles implicit support. That opens the company up to more criticism and a potential row with one of its biggest advertisers, Walt Disney Co., which is engaged in an escalating dispute with DeSantis, Florida’s Republican governor, over his policies in the state. It’s also a break from the typical decorum held by social media leaders, who for years have faced scrutiny from users and policy makers about the potential bias of their ubiquitous platforms. While Musk has been open about his political opinions — before the US midterm elections in 2022, he advised users to vote Republican – this pushes Twitter further into being a partisan platform, and risks alienating other constituencies as well as advertisers averse to aligning with a particular political party.
  • Traders at five major banks colluded in chatrooms to swap sensitive information on UK bonds in the wake of the 2008 financial crisis, Britain’s antitrust agency said in a move that could pave the way for fines for some of the lenders involved. Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc, Morgan Stanley and Royal Bank of Canada each unlawfully shared details on pricing and trading strategies in chatrooms between 2009 and 2013, the Competition and Markets Authority said on Wednesday in its provisional findings. Deutsche Bank, which was the first to self-report its involvement, won’t be fined and any penalty that Citi receives will be discounted after the duo admitted to the collusion. By sharing the sensitive information with competitors the banks involved could have prevented the full competition benefits of anyone they traded with, including, pension funds and ultimately UK taxpayers, the watchdog said.